NOMURA: It Was An 'Epic Week', The Rules Have Changed, And There Will Be No Reversing The Fed's Big Bang

Here’s how you know we had a huge week in the market: Research analysts start using blogger terminology in their notes.

George Goncalves, the top interest rate strategy at Nomura, has a note out titled “The Fed’s Big Bang Moment, Reversible?” and it starts like this:

An epic week, to say the least, as markets re-priced to what some are calling the start of a new hawkish Fed world order.

And it gets better:

Unless one believes in time-travel, one cannot reverse the Fed’s big bang moment. Given the rules changed, we need to respect the shift, take a step back and re-analyse our views for now.

So what exactly happened this week to prompt such talk of “epic” moves?

Well if you were only going to look at one chart, it would have to be the yield on the 10-year US bond.

As you can see on this chart via Bloomberg, the yield has been rising since the beginning of May, but in the last week it went vertical, with interest rates ending at 2.53%.

BloombergSo what’s this new “hawkish” Fed all about.

Essentially what happened was, Bernanke made it clear that the “taper” (the wind down of bond purchases) is on. Assuming the economy stays on forecast, the taper will start later this year, with a goal of having it wrapped up sometime in the middle of next year. It was his certainty that this is indeed the plan (as he even put some hard numbers next to the QE thresholds) that seemed to spook the market the most.

In a note published right after the Bernanke press conference, Goldman’s Jan Hatzius identified 5 reasons why you could characterise Bernanke as hawkish. We summarize in bullets:

  • The Fed is putting hard numbers for the first time on the winddown of QE.
  • The unemployment rate forecast was lowered significantly.
  • The Fed says downside risks were diminished.
  • The Fed was dismissive of current disinflation trends (said they were transitory).
  • And Bernanke was clearly not concerned about the above spike in interest rates (in fact, if you want to check out a chart, you can see right here how interest rates spiked right after Bernanke said he wasn’t concerned about spiking rates on Wednesday).

So the view from Wall Street is that we got regime change this week. For the first time since the crisis, we got hints of the Fed actually wanting to turn the corner.

It may be a while before the Fed actually does turn the corner. But clearly the Fed wants to, and thus the “epic” week Goncalves is referring to above.

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